BOJ Increases QE

On April 4, the Financial Times headlined "Bank of Japan follows the Fed, on steroids." Pedal-to-the-metal reflects new governor Haruhiko Kuroda's policy.

At a news conference he said:

"This is an entirely new dimension of monetary easing, both in terms of quantity and quality."

Except for emergency late 2008 easing, its the largest ever BOJ monetary madness. It's not "short-term emergency" driven. It's a "deliberate change in philosophy."

It abandons everything BOJ said about monetary policy before. It's high risk. The fullness of time will have final say. It may hit home like a hammer.

Plans are to double BOJ's monetary base. Kuroda wants it done in less than two years. The Fed doubled its balance sheet more slowly. Any significant rise in JGBs (Japanese government bonds) means Kuroda's strategy failed.

Until now, BOJ spent 21% of Japan's GDP on QE. It mostly bought short duration bonds. It hoped doing so would "leak out of the banks into the rest of the economy." It never happened.

Kuroda plans to buy around 70% of JGBs. He'll keep doing it for two years. If inflation begins rising, purchases will slow. Instability may follow. Bond prices may fall sharply. Yields will rise. Losses could damage BOJ's balance sheet and credibility.

PNB Paribas Tokyo economist Ryutaro Kono believes "(i)f you pursue a radical policy, asset prices may change greatly, but if you set off a bubble and make the overall economy unstable, then you end up getting your priorities wrong."

Sumitomo Mitsui Asset Management economist Hiroaki Muto said ("t)argeting the monetary base will lead to a huge increase in current account balances that commercial banks keep at the BOJ, but I'm still not sure if this money will move through the economy."

Principalis Asset Management's Pippa Malmgren said "(w)e've never seen such unconventional methods used to create as much inflation as possible."

Monetary and economics Professor Lex Hoogduin called the effects Kuroda's easing "very difficult to control. At the same time, it will be politically very difficult to put a brake on this process. The policy can derail and can lead to distortions in the Japanese economy."

PIMCO's Bill Gross believes BOJ easing risks creating a rout in the yen. G-7 countries may not tolerate it. Much more depreciation is needed "to get even close to 2% inflation," he added.

It hasn't before so why now. At risk is heading it higher, not lower.

Kuroda says now's not the time to worry. "I'm not concerned that longterm interest rates could spike or asset market bubbles will emerge. I don't have any intention of financing government spending."

How many times before have we heard grand plans? How many rosy scenarios turned sour? How many bad endings followed? In the late 1980s, BOJ policy escalated asset and property prices. It did so to unprecedented levels.

Nearly 25 million Americans remain jobless. Low-pay/poor benefit part-time or temp ones replaced full-time ones. Inflation's around 9% based on how calculated decades earlier. Poverty or close to it affects half of US households. Record numbers need food stamps.

Kuroda thinks like Bernanke. "We all know how this will end," says Summers. He expects disaster. Every inflated bubble pops. "This time will be no different."

"The lessons from Cyprus are obvious." Warning signs appear early. Cyprus first requested bailout help last June. Months later, it's entire banking system shut down. Unsecured depositors stand to lose most of their wealth. Some may lose everything.

Eurozone economies and America are troubled. So is Japan. Doubling down on what failed for two decades won't work. Expecting different results from doing the same thing repeatedly reflects insanity.

"In the absence of a multiplier, open market operations, which simply change reserve balances, do not directly affect lending behavior at the aggregate level."

"Put differently, if the quantity of reserves is relevant for the transmission of monetary policy, a different mechanism must be found."

"The argument against the textbook money multiplier is not new. For example, Bernanke and Blinder (1988) and Kashyap and Stein (1995) note that the bank lending channel is not operative if banks have access to external sources of funding."

"The appendix illustrates these relationships with a simple model. This paper provides institutional and empirical evidence that the money multiplier and the associated narrow bank lending channel are not relevant for analyzing the United States."

Helicopter Ben dropped lots of money on Wall Street. Doing so sent financial asset prices soaring. None went to Main Street where it belongs. Dire economic conditions there matter. Things head from bad to worse. Nothing ahead looks promising.

If QE stops, "confidence in the US dollar would rise. Money would flow into US investments, both supporting the US stock market and helping to finance the large US budget deficit."

"Gold and silver prices would decline. Negative dollar expectations would be squeezed out of oil and grain prices, although drought, flood and supply factors would continue to impact grain prices, and the administration's wars can impact oil prices."

What's needed is "a coherent fiscal policy and the reality that a record 90 million Americans left the labor market entirely, and that 40% of the unemployed ranks have been out of work for over six months."

Tripling the Fed's balance sheet to $3.2 trillion did little to stimulate growth and create jobs. It hasn't prevented the ratio of new hires to job openings from returning to early onset fall 2007 recessionary times.

Informed Activist

Speaking Events

Buy Books

Get Gear

The log-in box below is only for bloggers. Nobody else will be able to log in because we have not figured out how to stop voluminous spam ruining the site. If you would like us to have the resources to figure that out please donate. If you would like to receive occasional emails please sign up. If you would like to be a blogger here please send your resume.

User login

Username: *

Password: *

CAPTCHA

This question is for testing whether you are a human visitor and to prevent automated spam submissions.